Pay attention to ways to lighten debt load

Carolyn BigdaYour Money staff reporter

Though much news recently has focused on the problems in selecting a student loan provider--thanks to allegations that some lenders and financial aid offices have been in cahoots--for many students graduating this spring the larger issue is how to pay back all that debt.

It's no small matter. The median debt load for graduates of a four-year private college is $19,500, according to the College Board, a non-profit association of colleges and education groups. For students at public schools the figure is $15,500.

Then there's credit-card debt: More than half of undergraduates carry a balance, an average of $2,864 by their fourth year, according to the latest data available from Nellie Mae, a student loan originator.

Faced with that level of debt, you easily can feel overwhelmed when you're also trying to scrape together a deposit for an apartment or buy a work wardrobe.

"You have to suddenly learn rules about budgeting and debt that you probably didn't learn in school, because no one ever teaches you this stuff," said Lynnette Khalfani, author of "Zero Debt for College Grads: From Student Loans to Financial Freedom."

But these steps can help make it all more manageable:

-- Figure out what you owe

First, face the ugly truth and add up exactly what your debt is. You can track down your federal student loans at www.nslds.ed.gov. For any private student loans and credit card debt, go straight to the lender for balance and interest-rate information.

Doing this exercise is important: Your student loans may have been sold to another lender while you were in school, and that lender should have your updated contact information. Otherwise, if the lender has an old address you could miss a payment.

"You don't want to miss any payments, because otherwise you'll ding your credit," said Robert Shireman, executive director of the Project on Student Debt. A missed payment also could ruin your chances of snagging rate discounts, which depend on pristine repayment behavior.

-- Lower your rate

Most student loans, both federal and private, do not go into repayment until six months after you graduate.

Credit-card bills, of course, come due every month.

If you are worried about making those payments in addition to your student loan bill, call your credit card's customer service number and ask for help. Start with trying to lower the interest rate. On average, interest rates on student credit cards are 1 to 2 percentage points higher than traditional cards.

"Let them know that you're no longer a student and now should get a preferred rate," said Ed Mierzwinski, the federal consumer program director of the Illinois Public Interest Research Group. Bolster your case by mentioning any low-rate offers you have received.

According to a 2002 Massachusetts PIRG report, 56 percent of consumers who call their card company succeed in reducing their rate.

-- Consider repayment alternatives

If you're still worried about making your monthly debt payments consider an alternative repayment plan for your student loans.

Federal loans offer the most flexibility with repayment options: You can make so-called graduated repayments, in which your first payments are lower and then increase over time. You also can extend the repayment term from the typical 10 years to as much as 25 years, or set the payment amount to a percentage of your monthly income.

Some of the same repayment alternatives are available for private loans, too. Keep in mind, though, that the longer you take to pay off the loan, the more you will pay in interest. And private loans tend to carry higher interest rates: the prime rate (8.25 percent), plus an additional percentage based on your credit rating.

The maximum rate on Stafford loans is a fixed 6.8 percent. On Graduate PLUS loans, a federal loan available to graduate and professional students, it's a fixed 8.5 percent or lower.

As a result, "If you need to extend payments out, do that on the lowest-rate loans, which are likely to be the federal loans," said Shireman of the Project on Student Debt.

You can see how changes to your monthly payment will affect the total interest you pay at www.finaid.org/calculators.

-- Think before you consolidate

One other way to potentially lower your monthly payments is to consolidate your debt. Consolidation combines your loans (generally only the federal ones) into one big loan at a new, fixed rate. It also extends the repayment period, helping lower your monthly bill.

Before you consolidate, though, check whether you'll save on interest at www.salliemae.com/content/tools/calculators/consolidation.

And make sure to compare any principal or rate discounts between the federal and consolidation loans.

"There tend to be slightly better discounts on unconsolidated loans," said Mark Kantrowitz, publisher of FinAid.